Fuel-dependent pricing of IPP´s electricity under limitation of CO 2 emission in electric power industry of Japan

In Japan, entry of independent power producers (IPP´s) to an electric power market was authorized in 1995. Many IPP´s use coal or residual oil for the economical electric power generation. However, because of high carbon intensity of these fuels, the large-scale entry of such IPP´s might influence the reduction of CO₂ emission in Japan. In this paper, we evaluate fuel- and capacity-dependent break-even cost of IPP´s electricity viewed from the generation cost of the electric power utility. The evaluation is based on the optimum generation mix, where the limitation of total CO₂ emission from the electric power industry is exogenous parameters. Then, we proposes the fuel-dependent pricing of IPP´s electricity considering the entry probability of IPP´s into the electric power market